Precious Metals

     

 

 

Hostages of Irredeemable Scrip

Stockholm Syndrome is defined as “…a condition that causes hostages to develop a psychological alliance with their captors as a survival strategy during captivity.” While observers would expect kidnapping victims to fear and loathe the gang who imprison and threaten them, the reality is that some don’t.

 

Images from the Kreditbanken robbery at Norrmalmstorg in central Stockholm in 1973. The two bank robbers took four hostages, who afterward complained that they were far more scared of the what the police might do than of the robbers. One of the hostages even struck up a personal friendship with one of the hostage takers a few years later (despite the fact that he remained a career criminal).  Psychologists became interested in this odd behavior and criminologist Nils Bejerot eventually coined the term “Stockholm syndrome” to describe it. [PT]

 

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An Unenthusiastic Market

On Thursday, July 6, in the late afternoon (as reckoned in Arizona), the price of silver crashed. The move was very brief, but very intense. The price hit a low under $14.40 before recovering to around $15.80 which is about 20 cents lower than where it started.

 

1 kilogram cast silver bars from an Austrian refinery. These are available in 250 g, 500 g and 1 kg sizes and look really neat. We use the 250 g ones as paperweights, so this is an investment with use value.  [PT]

 

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Last Week in Precious Metals: Peak Hype, Stocks vs. Flows and Capitulation

The big news this week was the flash crash in silver late on 6 July.  We will shortly publish a separate forensic analysis of this, as there is a lot to see and say.

 

Silver – 1,000 troy ounce good delivery bars, approved by the COMEX. Whatever you do, do not let one of these things land your feet. For readers used to the metric system: these bars weigh approximately between 28 to 33 kilograms (their weight is allowed to fluctuate in a reasonable range around 1,000 troy ounces; good delivery bars are inter alia stamped with their precise weight). They make for excellent door stops, but are at the same time potentially painful toe-stubbing obstacles. [PT]

 

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Mystery Nosedive

The price of gold dropped from $1,241 as of Friday’s close to $1,219 on the close Monday, or -1.8%. The price of silver fell from $16.58 to $16.11, or -2.9%. It is being called a gold and silver “smash” (implication being that one party or a conspiracy is doing the smashing).

 

The flight of the gold rocket, different phases [PT]

 

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Some Things Actually Go Up Before and During the Fall…

In recent issues of Seasonal Insights I have discussed two asset classes that tend to suffer  performance problems in most years until the autumn, namely stocks and bitcoin.

I thought you might for a change want to hear of an asset that will be in a seasonal uptrend over coming months.

 

Many things, including bitcoin, stocks and leaves tend to fall in the aptly named fall… but some things actually start to fly…

 

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The Earth is Still Round

Let’s establish three facts up front. One, the volume of contracts traded was not “millions” (as at least one conspiracy theorist is claiming). During the 1-minute window when the price of gold dropped from $1,254.10 to a low of $1,236.50 and recovered to $1,247, 18,031 August gold contracts traded. There was negligible volume in the October and December contracts.

Two, the Earth is round. This did not occur while “everyone” was sleeping (as at least one conspiracy theorist asserted). It happened when Europe was open and the UK had come online, at 9:01am British Summer Time (BST). China and Singapore were also open for business at that time.

Three, there was no single large futures trade that “smashed” the price, but a large number of smaller trades, with the largest trade being 296 contracts (close to 1 ton or $36 million notional). The chart below shows milliseconds (1/1000th of a second) from 9:01:00 to 9:01:30 – 30 seconds.

 

Trades in Comex August gold futures on June 26 just after the open of London trading, on a time scale of milliseconds. We would add the following caveats here: although this was chopped into many small trades, it is quite possible that the seller was a single entity (at least the seller of the bulk of the total contracts traded) – only there was no single buyer, but many smaller buyers, with larger bids only coming in after the price had already dropped quite a bit. We would concede that there exist fundamental reasons that might inspire a large sale, such as the recent rise in real interest rates (per our definition), or the upcoming release of the  Fed minutes in light of the more “hawkish” tone the merry pranksters have lately employed. Also, as Keith demonstrates below, the tracks left by the gold basis indicate that physical traders joined in. All that said, there is one point brought up by some of the “conspiracy-minded” that deserves consideration: 1. the trade definitely did happen at a time when Comex trading volumes are normally a tiny fraction of what they were on this occasion. 2. when someone places such a large trade at this time of the day, it will raise eyebrows, because that is not the best way to get the best price – a few hours later, “normal” trading volume would very likely have absorbed a similar amount of selling without affecting prices quite as much. 3. it happened just before a large options expiration, which provides a potential motive for not necessarily wanting to get the best price. To this one must keep in mind that open interest and trading volume in options on COMEX gold futures is absolutely humungous. Naturally, none of this is provable, and it may well not have been the motive behind the trade. It is not an unreasonable speculation though –  after all, the gold fixing scandal has shown that short term price manipulation is not beyond the capabilities of large traders, nor is their conscience necessarily an obstacle to such activities. However,  the emphasis is definitely on “short term” – we do not believe that anyone is capable of altering medium to long term trends in this market, or in any other liquid market (as an aside: the way we see it, this type of “manipulation”, if that’s what it was, would not be illegal, contrary to the gold fixing shenanigans). [PT] – click to enlarge.

 

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Fundamental Drivers of Gold Prices

[Ed. note by PT: we believe there is a lot less disagreement with Steve Saville’s approach than Keith assumes – we are adding comments in the chart captions below as well as an addendum and footnotes to illustrate what we mean – all our comments are marked with [PT] below – we have essentially made a discussion out of this week’s supply-demand report, as we believe these issues are of interest to all gold aficionados]

Steve Saville wrote a post this week, in which he proposed a model that indicates the fundamentals of gold. According to him, these are: (1) the real interest rate, (2) the yield curve, (3) credit spreads, (4) the relative strength of the banking sector, (5) the US dollar’s exchange rate, (6) commodity prices, and (7) the bond/dollar ratio.

 

Steve Saville’s fundamental gold price model (details see here) – this looks actually quite good to us. We follow the macroeconomic indicators it is based on as well – see e.g. “An Overview of Macroeconomic Gold Price Drivers” from mid April. As we understand it, the model is not trying to determine a specific gold price. It merely tries to show in if macroeconomic pressures are pointing toward a rising or falling gold price, and it seems to be doing that quite well. As Steve Saville mentions, the model is slightly leading the gold price (or at least has done so in recent years and on numerous previous occasions – that is not always the case as we have discussed in the past, see also our comment on the yield curve). Keith’s methodology of bringing the trading on gold futures into context with the spot market does the same most of the time (i.e., the fundamental price he derives is usually leading the market gold price). Both models are largely based on market-derived data, so this should be no surprise – we would assume they ultimately show the same forces at work. [PT]

 

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Shrinking the Balance Sheet?

The big news last week came from the Fed, which announced two things. One, it hiked the Fed Funds rate another 25 basis points. The target is now 1.00 to 1.25%, and there will be further increases this year. Two, the Fed plans to reduce its balance sheet, its portfolio of bonds.

 

Assets held by Federal Reserve banks and commercial bank reserves maintained with the Fed – note that while asset purchases and bank reserve creation are connected, the connection is loose (there are other factors influencing movements in reserves as well). [PT] – click to enlarge.

 

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Maurice Jackson Interviews Jayant Bhandari

We are happy to present another interview conducted by Maurice Jackson of Proven and Probable with our friend and frequent contributor Jayant Bhandari, a specialist on gold mining investment, the world’s most outspoken emerging market contrarian, host of the highly regarded annual Capitalism and Morality conference in London and consultant to institutional investors.

 

As soon as Jayant touches down in London, he is accosted by microphone-wielding young women eager to hear what he has to say…

Photo via financialpost.com

 

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The Socialist Politician-Bureaucrat with the Worst Timing Ever

As most in the gold community know, the UK Chancellor of the Exchequer Gordon Brown announced on 7 May, 1999 that HM Treasury planned to sell gold. The dollar began to rise, from about 110mg gold to 120mg on 6 July, the day of the first sale. This translates into dollarish as: gold went down, from $282 to $258. It makes sense, as the UK was selling a lot of gold… or does it?

 

Former UK chancellor of the exchequer and later prime minister Gordon Brown, about to make a splash. He had a sense of market timing that is not exactly uncommon in political circles. In the UK market timing with respect to gold is a particularly sore point.  Before Brown sold 400 tons right at the 1999 bear market low, the UK government had already performed a large sale once – it sold 800 tons at $42/oz. shortly before Nixon defaulted on the US gold exchange obligation; over the next decade the dollar price of gold soared by nearly 2,500%. As a result, Brown’s decision to sell was like a giant bell ringing at a distance of about five feet –  even the deaf must have heard it. [PT]

Cartoon by Steve Bell

 

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Driven by Credit

The jobs report was disappointing. The prices of gold, and even more so silver, took off. In three hours, they gained $18 and 39 cents. Before we try to read into the connection, it is worth pausing to consider how another market responded. We don’t often discuss the stock market (and we have not been calling for an imminent stock market collapse as many others have).

 

NYSE margin debt has reached new record highs this year, dwarfing previous peak readings by an impressive margin. At some point this is bound to generate many long faces, gnashing of teeth and loud wailing. And overtime for margin clerks. [PT] – click to enlarge.

 

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The 11th Annual In Gold We Trust Report

This year’s Incrementum In Gold We Trust report by our good friends Ronald Stoeferle and Mark Valek appears about one month earlier than usual (we already mentioned in our most recent gold update that it would become available soon). As always, the report is extremely comprehensive, discussing everything from fundamentals pertaining to gold, to technical analysis to statistical studies on the behavior of gold under different economic scenarios.

 

August gold, daily – gold itself continues to look fairly strong recently, but its rally is currently not confirmed by precious metals stocks.  Silver is lagging the advance as well – click to enlarge.

 

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